Fitch Cuts Italy's Credit Rating to BBB+ on Political Uncertainty

Fitch keeps outlook on long-term issuer default ratings as negative

Credit rating agency Fitch has downgraded Italy's sovereign rating to BBB+, one notch down from A- due to the political uncertainty in the country following the inconclusive parliamentary elections in February.

Fitch also kept the outlook on the country's long-term issuer default ratings as negative.

"The inconclusive results of the Italian parliamentary elections on 24-25 February make it unlikely that a stable new government can be formed in the next few weeks. The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession," Fitch said in a statement.

In the election, a centre-left coalition won the lower house but it fell short of control of the Senate, which has equal legislative powers, resulting in a hung parliament.

The rating agency said that Italy's ongoing recession is one of the deepest in Europe, with gross domestic product expected to decline by 1.8 percent in 2013, following a 2.4 percent contraction in 2012. The unexpected fall in employment and weak business sentiments add further worries, according to Fitch.

The deeper recession and its adverse impact on headline budget deficit would result in the gross general government debt (GGGD) increasing to about 130 percent of GDP in 2013 from the previous estimate of 125 percent in mid-2012. The country currently has a public debt of €2tn ($2.6tn, £1.7tn).

Fitch's rival Moody's earlier warned that the political uncertainty in Rome could have implications "well beyond Italy itself," and could affect the ratings of other members of the union.

Italy has been one of the hardest-hit economies in the euro region and it has been in recession since the middle of 2011. The country's 2.4 percent contraction in 2012 compares to a 1.3 percent decline in Spain. Only Portugal and Greece, which shrank 3.2 percent 6.4 percent, respectively, fare worse than Italy.